Sun | Dec 11, 2016

Public pension reform programme won't work - Unfunded obligations at $680b and growing

Published:Wednesday | August 20, 2014 | 12:00 AM

A.C. Countz, Guest Columnist

Public-sector employees now enjoy very generous pension benefits that Government pays from current revenue.

The Jamaican Government does not put aside the necessary funds to finance pension obligations as they are incurred, as would be done in a private-sector scheme. It has a planned 'reform' that will further increase the pension fund deficit. This is irresponsible.

If past pension benefits were funded, as in most private-sector firms, that is, in a special segregated fund with an adequate balance to pay for the pension obligations relating to past service, then the Government (taxpayers) would have to find, right now, about $680 billion to put into this fund.

Additionally, Government would have to put in 5.0 per cent of pensionable annual salary for the public service in years going forward.

Currently, there are many members of the public sector, those of pensionable age, who receive pensions totalling $23 billion per annum, while employee contributions amount to $4.4 billion per annum.

In other words, Government is paying out annually almost $19 billion more in pensions than incoming employee contributions.

Government now plans to reform the pension plan by April Fool's Day 2016.

CURRENT PROPOSALS

The reform hopes to achieve:

1. Unification of all the different legislations that deal with these pensions and, as far as possible, standardise pensions terms across the whole public sector;

2. A defined benefit scheme would continue, though moderated;

3. An increase in retirement age to 65, gradually for existing employees - apparently lower retirement age for soldiers, policemen and maybe national and local politicians;

4. Calculate pensions based on average last five year's service (calculation now based on final salary);

5. Calculate pensions based on 1.8 per cent of average last five year's service for very year served. There would be transitional arrangements whereby persons over 54 years old at the start of reform would get a higher percentage of between 2.0 per cent and 2.2 per cent.

6. Pensions would not be indexed although the Government might increase pensions if a 'surplus' in the scheme is produced - as there is no segregated fund, one cannot imagine how this surplus is to be calculated; and

7. A lump sum of 25 per cent of pension benefits payable on retirement and ongoing pension reduced - presumably the reduction will be actuarially calculated.

The Government proposals in the White Paper are faulty and, if implemented, will not make the public-sector pension plan affordable in the future. It is a Band-Aid when strong reform is needed.

The finances of the country are in a disastrous, although possibly better managed, condition.

RIGHT WAY FOR REFORM

Here are some suggestions for pension reform that are more appropriate than those in the White Paper:

1. Terminate the existing defined benefit scheme. Honour past service with existing benefits;

2. Commence a defined contribution scheme at once for ALL public servants, including statutory bodies and executive agencies. All future service for existing employees and all new employees to go into the defined contribution scheme. All employees to start paying a basic contribution of 5.0 per cent of pensionable salaries - these should be defined to exclude non-salary benefits. Employees should be encouraged to make further voluntary contributions to become entitled to a larger pension on retirement. Government to seek a waiver from IMF to allow them to fund the employer's contribution of 5.0 per cent per annum from now;

3. Defined Contribution (DC) scheme to be operated in a properly managed and transparent segregated fund;

4. Government should face the issue squarely and acknowledge that they have debts, not accounted for in the national debt, of say $700 billion representing the present day value of unfunded obligations. This amount should be properly accounted for in the national debt and arrangements made to fund it;

5. It is irresponsible for Government to reform the public sector pension scheme in a way that is certain to continue to increase the size of its unfunded obligations. Proper reform will be difficult to deal with, especially coinciding with the end of the pay freeze, but to do otherwise is once again not to face reality.

The basis of any reform must be to halt the growth of the unfunded obligation of the scheme in respect of past service and to fund on a current basis future service obligations.

Jamaica is badly served if EPOC, civil society and private sector organisations - to say nothing about the IMF - allow this pusillanimous approach to be followed.

Government reform must at a minimum stop the growth in the unfunded obligations of the scheme and include a plan to fund what is due for past service over a committed period of time.

A defined contribution scheme should be introduced for all future service.

This will be impossible for government to do unless there is public pressure on them to counterbalance the civil service lobby.

This column reviews the audited and in-house accounts and reports of companies and entities owned or influenced by Government.

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Responsible ministers

Dr Peter Phillips Ministry of Finance and Planning

Derrick Kellier Ministry of Labour and Social Security